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Get your taxes done using TurboTax
A qualified dividend is a type of dividend that is taxed at the capital gains tax rate. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified. For individuals, estates, and trusts, qualified dividends are taxed at the current capital gains rate of 15%. For individuals whose income tax rate is 10% or 15%, then the capital gains tax rate is zero.
These qualified rates are lower than the typical income tax rate that unqualified, or ordinary, dividends are applied to. Non-qualified dividends do not qualify for the lower tax preference and are thus taxed at an individual’s normal income tax rate. Regardless of your tax bracket, this difference means you will pay significantly higher taxes on a non-qualified payout.
The IRS states that “qualified dividends are dividends paid during the tax year from domestic corporations and qualified foreign corporations.” For the most part, this means that regular (usually quarterly) dividends paid out to shareholders of for-profit companies on the New York Stock Exchange, NASDAQ, AMEX, or other domestic corporations that might not trade on the stock exchanges, are usually qualified and thus taxed at the reduced capital gains rate.
However, investors must meet certain requirements to enjoy the reduced tax rate. Investors must adhere to a minimum holding period. For common stock, a share must be held more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. For preferred stock, the holding period is 90 days during the 180-day period beginning 90 days before the stock’s ex-dividend date.
So, if an investor is paid a dividend by a company and they meet the holding period criteria, then those dividends are qualified. If the holding period is not met, then the dividend is unqualified (and thus taxed at the normal income tax rate).